Earlier this month the Insolvency Service published its annual figures for the number of directors that it has disqualified in the twelve months to the end of February 2020.
1,164 former directors, were disqualified from acting as directors of companies for periods of between 2 and 15 years. This figure is slightly down on last year, but the numbers remain within a fairly narrow range year on year, largely to due to resources allocated to government for enforcement.
A Disqualification Order prevents a director of a company that has become insolvent, from acting as a director of another company. It also prevents that individual from taking part in the promotion, formation or management of any company, even where they are not formally appointed as that company’s director. These measures are aimed at protecting the public from directors who are unfit to act in the best interests of the company or more seriously, directors who have acted fraudulently or dishonestly.
The scope of disqualification is wide ranging. It covers acts by directors, such as, continuing to trade and incur credit where they know the company is insolvent; to conduct where directors have fabricated invoices for work that hasn’t been carried out. There are numerous ways in which a director may be seen to have breached his / her fiduciary duty to the company and these breaches are set out in the court proceedings which are taken by the Secretary of State for Business, Energy and Industrial Strategy (BEIS).
The new figures reveal that of the directors disqualified last year, 1,023 of them entered into Disqualification Undertakings and only 141 of them were subject to Court Orders.
Prior to the commencement of court proceedings and / or once court proceedings are underway, the Secretary of State will offer defendant directors the option of entering into a voluntary disqualification undertaking. The advantage of this to the director is that they will save the legal costs of contested court proceedings and they may be given a reduced length of disqualification. A disqualification undertaking results in the same consequences for the defendant as they would face if a Court Order was made against them.
It is also a criminal offence for a director who has been disqualified, either by undertaking or Court Order, to act in breach of the terms of that undertaking or Order and if he / she does this then they may become personally liable for the debts of the new company.
A disqualified director can apply for the court’s permission to act as a director of a particular company, usually subject to specified restrictions. This type of application, known as a section 17 Company Directors Disqualification Act 1986 application, will need to set out the checks and balances that will be put in place by the company to ensure that the director’s previous failings are not repeated.